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You can contact the author (Teguh Hidayat) by email, teguh.idx@gmail.com. The author live in Jakarta, Indonesia.

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Between Medco, Newmont, and Bumi Resources

On Friday, July 1, 2016, the management of Medco
Energi Internasional (MEDC) announced that the company will acquire PT Amman
Minerals International (AMI), which previously acquired a 82.2% stake in PT Newmont
Nusa Tenggara (NNT) at US $ 2.6 billion or equivalent to Rp34.3 trillion (based
on the exchange rate Rp13,200 per US Dollar), thus MEDC will become an indirect
shareholder in NNT. Soon after that MEDC shares rose 24.7% in a single day onto
Rp1,870 per share, drawing the attention of stock traders, but in this writing I
will invite you to dig deeper about Medco's corporate action, complete with the
investment opportunities that may arise. Okay, here we go!

At the beginning, Newmont Nusa Tenggara was owned
by three shareholders, ie Newmont Corp. (United States) who hold 45% stake,
Sumitomo Corp. (Japan) who hold 35%, and a local company named PT Pukuafu Indah
who hold 20%. Later, based on regulations from the Government of Indonesia,
Newmont and Sumitomo Corp as foreign entities must sell/divested part of their
stakes so that they would hold a (maximum) 49% stake in NNT. Because Newmont
and Sumitomo together hold 80% stake in total, there was a 31% stake in NNT to
be divested. At first the Government would buy the divested shares, but they do
not have the funds, so that the shares were auctioned to several private
groups.

And the one who able to seize the opportunity was
Bakrie Group. In 2009, together with the Provincial Government of West Nusa
Tenggara, they established a joint venture entity called PT Multi Daerah
Bersaing (MDB). Bakrie Group through Bumi Resources Minerals (BRMS) holds a 75%
stake in MDB, while the remaining 25% held by the Provincial Government. MDB
then acquired a 24% stake in NNT for US$ 850 million. Thus, BRMS indirectly
holds 18% stake in NNT.

Then here’s the fun part: Since the very beginning,
the Bakrie Group had intended to acquire a fully 100% stake in NNT, or at least
51% so that they would be the controlling shareholder of the company, just like
when they successfully acquired majority ownership in Arutmin, Kaltim Prima
Coal (KPC), and others. After MDB successfully acquire 24% stake in NNT, there were
the remaining 7% stake in NNT to be divested by Newmont and Sumitomo Corp, but
the Central Government remained unwilling to take the remaining shares. MDB had
offered to also buy the remaining 7%, but this time the Newmont Corp flatly
refused to sell their shares to Bakrie, because they knew that by doing so they
may lose control of NNT. Although Newmont Corp and Sumitomo are only allowed to
hold a maximum 49% stake in NNT, but they still want to have a full control
over the company, by making the other shareholders to hold stakes in smaller
amounts than theirs.

So now the point of the game lies on PT Pukuafu
Indah, which is owned by a local businessman named Jusuf Merukh. Mr. Merukh had
no intention to become the controlling shareholder in NNT, but his bargaining
position becomes very high after the Bakrie Group approached him to acquire
their 20% stake in NNT, while Newmont Corp also continues to persuade Mr.
Merukh not to sell his stake to Bakrie.

And it looks like Newmont Corp came out as the
winner. In 2010, a local company called PT Indonesia Masbaga Investama (IMI) acquired
a 2.2% stake in NNT for US$ 71.3 million from PT Pukuafu, so now PT Pukuafu
only held 17.8% stake in NNT. Interestingly, IMI obtained the money from
Newmont Corp in form of loans, so it can be said that it was Newmont Corp who acquired
the shares. After this, even if the Bakrie Group through MDB successfully wiped
out the 17.8% stake owned by PT Pukuafu plus 7% of the divested shares, they
will only hold a 48.8% stake in NNT in Total, so Newmont Corp along with
Sumitomo will still have a larger stake in NNT (49.0%), so of course they will
still be in control of NNT. Bakrie Group itself could not acquire 2.2% stake of
NNT which held by IMI, because since the beginning the company has been backed
up by Newmont Corp.

After that, the Bakrie Group stop ‘chasing’ Newmont.

Time elapsed. After 2011, the prices of
commodities including coal, gold, and copper began to fall, and continued to
fall until Newmont Corp itself began to have financial difficulties, as well as
the Bakrie Group. NNT’s financial performance itself continued to fall, where
in 2014 the company lost US$ 114 million (NNT is a private company private, but
its financial statement’s summary can be found in the financial statements of
BRMS). Also in 2014, Bumi Resources (BUMI) as the parent entity of BRMS began
to have problems with its huge debts, therefore they sell some of their assets
to pay debts. Because the Bakrie Group realized that they have no chance in
acquiring NNT as a whole, their 24% stake in NNT become one of the assets being
considered for sale.

Finally on June 30, 2016, BRMS through MDB agreed
to sell its stake in NNT to a company called PT Amman Minerals International
(AMI), which had previously acquired NNT shares which owned by Newmont Corp,
Sumitomo, and IMI, and AMI in turn will be acquired by MEDC. However, based on
the announcement from the management of BRMS, the sale will only be effective
after receive approvals from the Government, MDB’s lenders (because MDB
acquired a stake in NNT by using debt), and other approvals required by the
capital market authorities. In essence, BRMS only agreed to sell their stake in
NNT to Medco Group, but about the price, etc., it is still under negotiation.

But if we look at the announcement from the Medco
Group as a reference, where MEDC will acquire AMI which holds a 82.2% stake in
NNT for US$ 2.6 billion, and we assume that AMI paid the same price for acquiring
NNT shares from Newmont Corp, Sumitomo, IMI, and MDB, then BRMS as the holder
of an effective 18% stake in NNT would receive US$ 570 million.

An Investment Opportunity in MEDC? Or BRMS
instead?

If it is true that Medco acquired NNT from BRMS at
a price of US$ 570 million, it means that BRMS just sold NNT in a losing
position, because as already mentioned above, BRMS through MDB acquired a 24%
stake in NNT for US$ 850 million in 2009, so that BRMS as holder of a 75% stake
in the MDB has paid US$ 637.5 million (850 million x 3/4). On BRMS’ financial
statements, it is clearly stated that the value of their shares in NNT has
grown into US$ 1 billion because of the accumulation of net income.

So if BRMS only receive payment of US$ 570
million, the company will report ‘loss on disposal of investments’ in its
financial statements, because although BRMS obtain US$ 570 million in form of
cash, but the company also lost US$ 1 billion of its investment assets. But
considering the reputation of the Bakrie Group, it is also possible that they
sold their stake in NNT to MEDC at premium price, so that they make money
instead of losses, from the transaction.

But one thing for sure, MEDC acquired a 82.2%
stake in NNT for US$ 2.6 billion. The book value of NNT itself was US$ 3.12
billion in the first quarter of 2016, which means that MEDC acquired NNT at PBV
of 1.01 times, aka very cheap considering that NNT has returned to make profit
in 2015, which continued in 2016, and the value of the profit could be even
greater in the future of the price of gold continues to go up (the price of
gold began to rise since six months ago). So although MEDC acquired NNT using
borrowed funds (of course) from three banks namely Bank Mandiri, BNI and BRI,
but the profits generated from the investment will be much greater than the
interest to be paid.

Thus, it is quite clear that the opportunities lie
in MEDC, not BRMS, let alone BUMI. At the price of Rp1,870 per share, MEDC’s
PBV is only 0.7 times, obviously cheap, although it is also worth noting that
MEDC is never ideal for long term investment because of its extremely small profit
margin as an oil company, even at the times when the oil prices were in the
level of US$ 100 per barrel. However, MEDC is also not that bad, so when there
is a good news like this, the stock might offer an opportunity for medium-term
trading, especially since the news about Newmont’s acquisition would be ‘preserved’
in the coming months, as the completion of the acquisition process still has to
wait for the approval from the Government and the AGM.

However, given the MEDC is not good for long term investment
(unless if MEDC’ net income jumps later because of the additional profit from
Newmont, but even if that actually happens, it wouldn’t be in near future),
then you should be cautious and watch for the right timing (to buy). And what
about BRMS? Well, although I do not see that the company's financial
performance will improve even after later the acquisition process is complete,
but its stock is still likely to be ‘playing’ because of this story about
Newmont, though, of course, to buy stocks based on such analysis is a
speculation. Your call!